Auditors helped find £7.5m after it was “mislaid” due to an “alarming” lack of control in Newham LBC’s basic financial systems, it has emerged.
Janet Dawson, partner at Ernst and Young, told the council she was “concerned” about the council’s historic financial control weaknesses while a number of councillors expressed a lack of confidence in the council’s ability to maintain financial controls in the future.
Deborah Hindson, director of finance and section 151 officer at Newham LBC, told LGC: “The old [financial] system was not fit for purpose, it did not integrate and did not integrate with HR so we introduced a new system.”
She later added: “If you open a new accounting system that will raise some issues on closing the accounts.”
During a meeting of Newham’s audit board on Wednesday Hussein Alanezi, interim chief accountant at Onesource, the council’s support services provider, said £7.5m had been presented on the wrong sections of the balance sheet, which the auditor later “found”.
“A significant number of bank reconciliations were not done correctly every month, meaning £3.8m just went missing,” Mr Alanezi said.
Ms Hindson said during the meeting: “I can reassure you we do have strong financial controls, we just need to know what went wrong. But this is my statutory responsibility and I have been here the whole time. The old financial system was not fit for purpose. Everything was inaccurate.”
Rokhsana Fiaz (Lab), a member of the audit committee and Labour’s candidate to become Newham’s mayor, said the amount retrieved by the auditor was “£2.5m shy of our annual council tax” income and therefore “not insignificant”. However, Newham’s draft statement of accounts for 2016-17 state the borough gets about £67m in council tax income.
Ms Dawson said she was concerned there were “a lot of issues and control weaknesses” in the council which she described as “alarming”.
Regarding the council’s investigation of “serious fraud” in the council’s repairs and maintenance service department, Ms Dawson said that would have “no material impact” to the numbers.
LGC understands the audit board on 29 March heard of allegations of fraud dating back to 2017 whereby a lack of internal checks had led to the overpayment of overtime pay to some external contractors. That meeting was the first time the board had met since 8 November.
LGC also understands that the council was forced to recruit external staff after its supplier of agency workers was not able to recruit enough staff directly. This practice has since come to an end as of January 2018.
Ernst & Young said in its audit report, submitted to council: “We are required to communicate to you significant deficiencies in internal control.”
When asked if the number of corrected misstatements and disclosure adjustments presented in its audit report were “significantly high”, Ms Dawson agreed.
Ernst and Young said in its report: “There are thirty corrected misstatements that we wish to bring to your attention. We have also identified forty five disclosure adjustments during the audit which have been corrected by management in the revised financial statements.”
Paul Thorogood, director of finance at oneSource, said reconciliation problems had arisen after after the council migrated from the Masterpiece computer system to Oracle.
“The key downfall was when we moved from a simple coding structure to a more complex one,” Mr Thorogood said. “Officers struggled with that transfer so reconciliation was moved over to the accountants team.”
Mr Thorogood said he did not expect the problems to continue into the future, however, as the council had promised additional resource and most of the finance department’s staff had remained in post for the entire financial year.
Terence Paul (Lab), another member of the audit committee, said this was important due to the high turnover of financial staff in previous financial years.
Cllr Paul said: “All we ever hear is it wasn’t me guv. Nine out ten times, when we raise concerns, we’re told that that person has left or we don’t have enough money.”
Mr Thorogood was later told he had not answered councillors’ questions after being asked on three separate occasions for assurances over sufficient financial controls for the future.
Julianne Marriott (Lab), also on the audit committee, said: “We keep seeing these papers and keep being told it’s going to be OK, but nothing actually changes.”
After the meeting a spokesperson for Newham LBC said: “The council implemented a new financial system in 2016-17 and the audit uncovered a number of issues in relation to the mapping of financial data between the old, not fit for purpose system, and the new. This meant the accounts took longer to sign off than we would expect. As a result, management actions have been put in place to address all issues raised.
“Although it has taken a long time, the auditors have signed off the council’s accounts as being fair and accurate and they have again, as in previous years, given an unqualified opinion on them.”
The audit board was chaired by Lester Hudson (Lab), who is also cabinet member for finance.
A spokesperson for the Chartered Institute of Public Finance & Accountancy told LGC it “specifically advises” against members of the cabinet chairing positions on audit committees.
“Membership from executive members on the committee has been discouraged as it could deter the committee from being able to challenge or hold to account the executive on governance, risk and control matters,” Cipfa said in its publication, ’Audit Committees Practical Guidance for Local Authorities and Police’.
Cllr Hudson said it “remains with board’s discretion to raise any issue of conflict” of interest and added the audit board is a consultative committee and does not make decisions on behalf of the council.
The council reported in February that government grants to the council had been cut by almost 50% since 2010, leading to £173.8m of council savings in the same time period.
This story was updated at 15.50 on 13 April to correct an error which previously stated the missing £7.5m represented 75% of Newham LBC’s council tax income.